What Would Micropayments Do for Journalism? A Freakonomics Quorum

The notion of micropayments — a pay-per-click/download web model — is hardly a new one. But as a business model it hasn’t exactly caught fire, or even generated more than an occasional spark.

Lately, however, the journalism community has become obsessed with the idea. This is what happens when an existing business model begins to collapse: alternative models are desperately invented, debated, attempted, rejected, etc.

In recent days we’ve seen Walter Isaacson, the biographer/pundit who used to edit TIME, write a TIME cover story in support of micropayments; in a Times Op-Ed, Michael Kinsleybegged to differ; a not-quite-micropayment system for blogs, meanwhile, called Kachingle, will launch next month. In an interview, its founder, Cynthia Typaldos, says that she had the idea a few years ago but that “Newspapers weren’t desperate enough … About a year ago, I said things are changing and now is the time to get going on this.”

Where will all this lead? We asked a group of people who have given a lot of thought to micropayments — William Baker, Alan Mutter, Clay Shirky, and Marshall W. Van Alstyne — the following:

1. How would micropayments best work?
2. How possible is it that micropayments could be applied to the majority of online content, and how would this affect both online and print journalism?

Here are their answers.

Alan Mutter is on the adjunct faculty of the Graduate School of Journalism at the University of California, Berkeley; he’s also a media/technology consultant and author of the blog Reflections of a Newsosaur.

“The widespread adoption of paid content among general-interest media would require a critical mass of publishers to agree to collaborate more earnestly, more broadly, and more smoothly than any group of humans in history.”

It won’t be easy for publishers to overcome the Original Sin of giving away their valuable content for free. But it could be done. Theoretically. The most logical way, as detailed here in my blog, is some sort of micropayment system. Here’s how it would work:

Consumers would use their credit cards to fund accounts that would enable them to purchase online content through a system deployed at the largest possible number of participating websites. After a customer charged up her content-buying account, she could click a button to authorize payment whenever she wanted to watch a video, view a picture, listen to a podcast, or read an article.

One problem with this solution is that it wouldn’t work for one publisher if a competing publisher decided to provide the same, or nearly identical, content for free.

The other gotcha is that content would have to be secured so that someone who bought it could not turn around and provide it to a friend or, worse, publish it on the web for free. Although protecting content for unauthorized use is a formidable technical problem, it has already been solved reasonably well by a number of companies.

Has it been successfully done?

While most publishers to date have declined to invest in the implementation of such systems, the few companies that sell content by subscription — ranging from Consumer Reports to Congressional Quarterly — have been successful in building loyal audiences and revenues. Very few publishers have tried to sell articles one at a time.

The amount of the charge per article would be up to individual publishers, but presumably would be kept to pennies, or even fractions of pennies, to encourage maximum readership. Consumers might not like being micro-nickled and nano-dimed for every article, but they would get over it if the content were sufficiently unique and compelling. Remember, this works only if the content is unique and compelling.

Although a specialized newspaper like The Wall Street Journal successfully has required subscription access to its entire website, the widespread adoption of paid content among general-interest media would require a critical mass of publishers to agree to collaborate more earnestly, more broadly, and more smoothly than any group of humans in history. Could it happen? Theoretically. But don’t hold your breath.

What effect would this have on publications’ online readership?

There naturally will be fewer consumers for online content requiring payment. On the other hand, publishers could require advertisers to pay premium rates to pitch their wares to this valuable, loyal audience.

What effect would it have on print publications?

Print-advertising sales generate the preponderance of revenues for most publications, and those sales subsidize the content published online by most newspapers and magazines. Because online ad sales produce only about 10 percent of ad revenues at the average newspaper, it would make sense for newspapers to try to get paid something for the content they publish on the web. They already charge for copies of the physical paper, even though this does not cover the full costs of production and delivery. With ad revenues falling by double-digit rates at most publishing companies, every little bit of new revenue would help.

Marshall W. Van Alstyne is an associate professor in the Information Systems department at Boston University and a research scholar at M.I.T.

“Putting micropayments on news is like putting tollbooths on an open ocean.”

Micropayments won’t solve newspapers’ pay-or-perish problem, at least not under current proposals. There are many reasons why micro-scalping readers won’t work, but let me start with two: the unique properties of information goods, and inefficiency.

News is not like an iTunes song; it’s perishable. Today’s front page is tomorrow’s fish wrap, and we don’t need to replay it. If anything, a reader benefits more from a second source than repetition from the first. Facts are delivered; songs and movies are created. Facts also can’t be owned, so when the Internet places geographically dispersed media in direct competition, the price of facts falls to marginal cost. In digital markets, that’s zero.

Micropayments introduce friction into an otherwise frictionless world. This means that no matter how efficient they become, it is more efficient to bundle. If a person makes one or two transactions with a news source, it’s more efficient to aggregate lots of them and bill a single advertiser once. If a person makes frequent transactions, it’s more efficient to aggregate those and bill that person once as a subscription. Any increase in micropayment efficiency improves bundling efficiency at least as much, because the gains accrue over more transactions.

Putting micropayments on news is like putting tollbooths on an open ocean. Internet users, awash in a sea of information, will avoid new barriers by navigating around them. And frankly, the interests of a free society are rarely served by building barriers between the people and their news.

Then how do we support great investigative journalism? Let me suggest three business models that just might work for newspapers and for users.

1. Bundle a media platform onto a technology platform. Charging technology vendors a modest flat fee to put ad-free content on cell phones, e-book readers, and laptops makes them more valuable and can cover a lot of market share. This is a bundling model that “feels” free: users pay no incremental unit cost for updated media they receive. It also eliminates ads.

2. Version and process information. Free ad-supported news can coexist with paid premium versions. Faced with a choice of an ad-supported free New York Times and a faster-loading, more graphics-rich version for $1/year, I suspect even digerati would choose to pay. The business question then becomes how to add enough novelty, speed, customization, community, and proprietary analysis to convert a $1 subscription into $10 or $150. Bloomberg charges for information processing on top of stock quotes and does just fine.

3. Invert the whole business. Use the friction of micropayments to solve a consumer problem and stem the flood of information from advertisers vying for their attention. Advertisers can bid for limited units of people’s time. This increases ad revenues and helps match particular ads to particular people. Vendors will bid low to rent New York apartments to sports fans checking scores for the Oakland A’s, but bid high to offer next week’s tickets. Publishers need to give up on the idea of profiting from distribution and focus on the idea of matching people to content.

The trick is not to add new types of costs, but to add new types of value.

William Baker is an executive-in-residence at Columbia University who is investigating “new media business models,” and is former C.E.O. of the Educational Broadcasting Corporation, the licensee of Thirteen/WNET and WLIW21 New York.

“Consumers must learn to associate costs, even small ones, with regular access to reliable news.”

Saving journalism in the U.S. is critical to our free society. In America, most of the serious reporting is done by newspapers which are in extreme economic distress.

With the 56,000 or so feet-on-the street journalists at the 1,400 plus newspapers, currently proposed models which involve only philanthropy will not work. It would take endowments of tens of billions of dollars. It would be an unthinkable Apollo project even before the current economic meltdown.

I see a combination of advertising, subscription, philanthropy, and micropayments to be a solution. It will take all of these as one segment grows and another shrinks to get us through this very dry desert.

Unfortunately, micro-payment models have not been thoroughly tested. The most successful subscription model is Consumer Reports, which has about four million paying online subscribers and another four million print subscribers. Consumer Reports takes no advertising. But the newspaper industry, with the exception of The Wall Street Journal, has been hesitant to attempt that approach. I’m not sure why. I have graduate business students at Columbia and Fordham working on models.

Perhaps a workable micropayment model is akin to what Skype does: you load up your account with, say, $20 and let the system automatically charge you a certain amount per click or story (maybe ten cents). Think of The New York Times with its tens of millions of online users going that route. Yes The Times will lose some, but it will keep many others because of the power of the brand name and its journalism. Will it work? How much is there to lose? I’m hoping to try this model at smaller newspapers and see what happens.

I’m a big believer in philanthropy and can see some place for it as an add-on to help with investigative reporting and other costly journalism. But I wouldn’t count on it to be a home-run savior.

It’s an unavoidable relationship: for good information to flow from journalists to readers, proportional revenue must flow the other way. Consumers must learn to associate costs, even small ones, with regular access to reliable news.

Clay Shirky is an adjunct professor in N.Y.U.’s graduate Interactive Telecommunications program and a digital media consultant in New York.

“The fantasy that small payments will save publishers as they move online is really a fantasy that monopoly pricing power can be re-established over we users.”

Online, small payments only work when the collector of those payments has end-to-end control of delivery, generally by controlling the hardware or software the user has access to. (This is true of all metered billing, in fact.) Whether it’s long-distance rates, iTunes purchases, or in-world currencies for online games, the core attribute of successful systems is the ability to prevent the users from expressing their preference not to be nickel and dimed.

Put another way, the fantasy that small payments will save publishers as they move online is really a fantasy that monopoly pricing power can be re-established over we users. Invoking the magic word “micropayments” is thus grabbing the wrong end of the stick; if online publishers had that kind of pricing power, micropayments wouldn’t be necessary. And since they don’t have that pricing power, micropayments won’t provide it.

To a first approximation, articles will be priced at free (which is only to say that what seems to be happening online is what’s actually happening). This is because the competitive loss of hiding them behind a paywall reduces the users’ ability to share them with friends, and it is this secondary distribution that creates the most important new opportunities online.

Users like sharing. We like it so much, in fact, that we are willing to reward amateur outlets that enable it at the expense of professional ones that forbid it. (This is how Wikipedia rather than Britannica became the English-speaking world’s encyclopedia of choice.) This strong preference for sharing in turn means that nickel and diming us not only raises the cost of a piece of content, it sharply lowers the value as well, because payment systems have to forbid such sharing in order to function.

This in turn opens the door to publishers who reward sharing rather than fight it, which creates the competitive pressure that destroys small payment regimes.

Applying micropayments to the majority of online content isn’t possible, because it’s not possible to establish a monopoly on news. Unlike iTunes, for example, which benefits from a legal regime designed to prevent sharing, discussion of events in the real world can’t be kept from circulation. (You can only stonewall things that are on your side of the wall.)

Publishers have been telling each other for years that eventually people will tire of being able to produce and share amateur content, rather than just consuming professional content, but the users don’t seem to have gotten that memo. Even if most traditional publishers formed a “cartel of news” tomorrow, all retiring behind a paywall on the same day, many net-native publishers, from Pro Publica to Spot.us to Off the Bus, would see their competitive advantage in attacking that cartel rather than joining it.

COMMENTS: 60

Micropayments will not work. Most people (and businesses) don’t like uncertainty. That’s why we sign up for phone plans with unlimited minutes instead of ones where we pay by the minute. No one wants to be clicking on a website and realize all of a sudden they owe $20. The only solution is probably a subscription based service where all the newspaper teamed up as a cartel to restrict access to information.

Micropayments would require vastly more effort to implement than subscriptions. I pay for various sources of information. Audio books, Ebooks at http://www.baen.com and others. The biggest issue I face is that most sites want way too much for their content. The economics of scale in electronic commerce are very large. Why should I pay near hardback prices for a book that costs significantly less than a hardback to the publisher? Take a look at the Baen model, $6.00 for the newest book. Or the way they sell ARCs(Advance Reader Copies). And still manage to pay double royalties to their authors on those sales. All with no DRM. Or look at Jerry Pournell’s Public Radio model at http://www.chaosmanor.com. My local paper is the Milwaukee Sentinel Journal. Their local coverage is valuable to me. But their other coverage is not. What we need is out of the box thinking, not tweaking the existing publishing models. There is money to be made. They question is who will make it?

When I buy a newspaper, I make a micropayment that is just about large enough to pay the distribution costs (probably not all of that).

Online, I expect these micropayments to be the same sort of arrangement. Since the distribution costs for a single article are likely to be less than a penny, I expect to be paying about 1/5th of a cent for each article.

Why bother again?

Keep in mind that some newpapers charged initially, and then found that getting a larger audience for their advertising was more valuable than that. The “original sin” was neither a sin, nor a reality.

I pay for the WSJ on-line and am able to share content on Facebook and other places. I do not understand why the NYT and WaPo have not adopted the same model. The mix of content to ads is about the same for these papers. I would imagine that the same reader base paying for WSJ would pay for WaPo and NYT as well. So what are we waiting for?????

The way to save journalism is for readers to “own” the “newspaper.” Readers pay for information and journalists vow to deliver it and not accept advertising revenue (or bribes) or other sources of income. This will align incentives between producers of news and consumers of it. It might also provide a role for foundations/philanthropies as clearinghouses for readers or aggregate “owners” of “newspapers.”

Back in the day, the journalists essentially owned “the news,” as there was 1-2 newspapers and 2-4 TV stations and 10-15 radio stations in a fair-sized city. Not a monopoly, but close enough to an oligopoly that control was never in doubt. Now that the subscription model was damaged by broadcast and killed by the internet, the tables have turned. “The News” is now whatever the reader will devote his/her eyes to.

So, give me an entirely “ownership” based “newspaper.”

1) I buy a “share” in a “newspaper” through a non-profit.
2) The “newspaper” hires a journalist and pays his salary and expenses.
3) The journalist creates ad-free “news” that I can access
4) I read and appreciate the news, and I pass it along to friends – along with an invitation to support the “newspaper’s” endeavors.
5) At the end of the year, the non-profit tallies up the contributions by the “owners,” subtracts the salaries and expenses (and a REASONABLE overhead), and divides and returns the leftovers to the “owners.”
6) If the non-profit didn’t attract enough owners to cover the journalist’s salary and expenses via selling “shares,” then the non-profit can decide not to renew selling “shares” in the “newspaper.”
7) Alternatively, the non-profit can find a “sponsor” for the “newspaper” (a la NPR underwriting) AND then disclose that sponsorship. (“Gourmet Dining by John Doe, sponsored by McDonald’s!”)

Voluntary micropayments would be welcome for websites like Wikipedia. Instead of sending them $20 once a year when they post a large donation banner, I’d rather them simply charge me 1/1000 of a dollar per page.

An alternative which has been catching on with digital goods (which people by and large don’t like to pay for, vis-a-vis tangible goods) is to let people pay by transacting WITH an advertiser. The economics are completely different than with display advertising, nor are there any transaction fees assessed by payment companies.

Ultimately, a company like Gap will pay maybe $10 CPM (cost per mille, or basically $0.01 per view) to advertise on a website. Gap will pay, however, maybe $10 to actually get somebody to purchase something at the store.

So why not give away content for free in return for a user patronizing a particular advertiser? Buy flowers for Valentine’s Day from a partner (e.g., FTD), get a year of WSJ for free. FTD pays a big bounty to acquire a customer. The dollars go to the WSJ.

Fandango uses this exact model, as does McAfee, as do several thousand other digital brands; this is somewhat self-serving as I run the largest company that provides these solutions (TrialPay).

This is not the only solution, but it certainly is one that works quite effectively at capturing a big chunk of the audience that doesn’t want to pay.